Episode Transcript
[00:00:00] Hello and welcome everybody to the Annuity Straight Talk podcast, episode number 197.
[00:00:06] I'm your host, Brian Anderson, founder and creator of AnnuityStraightTalk.com been doing it for a long time, refining information as I go, getting more specific when necessary, keeping things general. So everybody knows you're all included in this. Please like subscribe or comment on any of your favorite podcast platforms or on YouTube. This could be my last outdoor podcast. Getting a little chilly, had to put on the hoodie and the weather's kind of going away for us. But anyway, this is a topic I've covered before in different ways, and a lot of times we'll do this a little bit differently. Just explain it in different terms or from a different angle to get people to understand how it is. Because, you know, one perspective might not really apply to you. One thing I want you to do is open your mind to different possibilities and not just have tunnel vision, thinking about, oh, hey, that's not me. Well, some minor changes here and there. It could be you. So maximum guaranteed income versus no fee income from annuities covered both of these products a lot. Compared them a couple of times in different ways. I'm going to speak generally so that everybody that asks the question, they're going to be referred to this podcast before the newsletter goes out. I probably should go and link all the last podcasts so if somebody's doing some research based off this one, they can shoot off in different areas.
[00:01:18] If this seems applicable to you, you want to analyze it the right way. Watch four or five episodes, you're good to go. And probably more knowledgeable than 90% of people trying to sell these products. Hey, so guaranteed income is a fundamental part of every retirement. We got Social Security and pensions for lucky few. Both those sources essentially considered guarantee. If you need additional retirement income, people with sufficient assets will live off dividends and interest. Don't really need to make any major changes, don't need to lock in anything. Some still do. There's an advantage to using an annuity to fill the income gap, and that goes for people who saved more than enough to some people who have not saved quite enough or just enough. So I've demonstrated the power of this in the past. I'm going to keep doing it because again, everybody likes to see it from a different perspective. We need to talk about. And then it's going to change over time too, where your advantage in certain products is going to shift based on changing interest rates, economic conditions, all that stuff, your age, any of those things So a lot of you guys don't know, like, continually in the background. We're kind of working on different calculators to take this subjective element out of this. So you prove objectively where your advantage is, what works. It's all about the numbers. I'm going to boil those down and make them readily available to everyone so you can do some research on your own and figure it out. A lot of people recognize that they need income for one of the advantages that annuities provide not too long ago, the annuity advantage, where you have the advantage from annuities, whether it's fixed interest rate, guaranteed income, safety, all that stuff. But when it comes to annuities, everybody's got a hurdle to overcome before they can make a decision. You get contradicting advice and confirmation bias toward another option.
[00:02:50] So some people are so biased in their one path that they're just going to, no matter what research they do, they're going to find the angle that supports what they already believe. They're not going to change their mind. That's fine. Do what you like. So one of the biggest hangups is definitely going to be fees. And I certainly understand that you want to minimize those wherever you can to optimize the retirement portfolio. So when I talk to a lot of people, call about guaranteed income. Will an annuity help me? I want to know if annuity is right for me. Well, I really like the idea of guaranteed income. It sure makes retirement easy. That's another podcast, podcast. Annuities make it easier. And they would always say, like, well, I really don't want to pay fees. Okay, that's fine. You understand what the fee provides and what you equally forfeit by not paying it. I'm going to show you the complete difference and in what situations each option is best. I'm not going to do illustrations. I've done some of that in the past between these two types of products. This is going to be a reference going forward for anybody that asks that question. A lot of times we'll have that conversation. It's okay. Well, I'm going to show you both sides of this. In the meantime, before we have our second meeting, you want to just go watch this podcast or read this newsletter. And the newsletter takes five, six minutes to read, maybe three if it's short one. This is not a short one. So paying a fee gives you maximum guaranteed income, guaranteed with a capital G. An insurance company is on the hook to make monthly payments for the rest of your life at a set amount, now or in the future. And yes, they can make quarterly or annually however you decide it. I capitalize the word guarantee because annuities are the only financial assets that exist that can claim it. If you don't want to pay the fee, then your guaranteed income won't be as high. The insurance company takes the fee pads the reserve account to ensure the actuarial possibility of you living too long.
[00:04:21] A lot of people will see the illustration and the cash value goes to zero. The income is guaranteed for life regardless of what happens to the cash value. And they'll say, how can they do that? And it's not just about you. It's about the thousands of other people pooled into the deal that make the liability manageable and even profitable for insurance companies for centuries.
[00:04:40] They are better at doing that than any financial institution at anything. There are two types of no fee guaranteed income available just for anybody who gets real picky. First is that there are several contracts that have a fee based a guaranteed lifetime withdrawal benefit. They'll have an optional rider where the highest amount is something you get. Greater annual increases, higher payout rates, but you have to pay a fee for it. Or you can pay a lower amount or you can pay zero amount, but you get a lower annual increase or lower payout rates. I've had people make that mistake. Was like, well, I ran that product. Even other advisors. Well, you said 20,000 a year. I ran the product, it was only 15. It's like we checked the wrong box because you want maximum income. But that's technicality. There are a lot of those out there where you have a contract that's got two rider options, one with a fee, one without a fee. The second type of no fee guaranteed income is what I call a performance based guaranteed income contract. Now explain these specifically. These are like Allianz products that I talk about being misrepresented. They're perfect in a certain situation. I'm going to detail some places where those are appropriate. And then my buddy Nate, who's working with me now talked about he bought it for himself. We'll talk about that a little bit at the end as well. So this is what most people see. It essentially means that the growth in the contract contributes in large part to the income you'll receive in the future.
[00:05:50] Baseline guarantee. And the performance will enhance that income benefit for deferred income. For comparison purposes, I'm going to focus on these type of contracts that are performance based guaranteed income. Three areas. Guaranteed income is again the highest when you pay a fee. This doesn't mean that the Performance based contracts, the ones without a fee won't catch up in the future. It just means that you are risking the highest available payout because you don't want to pay the fee. If the growth of the contract isn't sufficient to match the fee based payout, then you might be without necessary income. Crazy projections in the beginning have led a lot of people down in the past. So if you need the money, then take the full guarantee and pay a fee for it. It's well worthwhile because you need it. These are somewhere a lot of people got in trouble. It's like, oh, the giant bonus and this. And I thought I could walk away with the money, but I can't. Now I got the income I don't need or I don't want it, or I needed the income. It was supposed to be 50,000 a year, it's only 31,000. That's a big difference. You got to pay attention to the projections on those. So account value growth. Added benefit of having an income rider is you get to maintain an asset on your balance sheet. Essentially, it solved a major objection to annuities of the past where you give the insurance company the premium, you get a promise of payments, but the money's gone. Sadly, however, no matter what kind of illustration you see, maximum guaranteed income contracts with a fee are not built to grow substantially. Your options are more limited in the future. The insurance company puts all the actuarial weight behind the guaranteed income payment. The cash value is secondary. It's beneficial if for whatever reason you don't live long enough to collect the income. It's beneficial if your situation in life changes. You don't really need the income. You've got some cash value to go do something else with, but it's not that efficient for that purpose. It's efficient for maximum income. Performance based income without a fee will usually have much more growth potential. You're taking the risk for the level of future income. So they're going to give you more growth. As a trade off, more money means more options. Your account grows faster.
[00:07:40] That leads right into the residual value. What's left over? Do you want an income plan with a legacy? Do you want to income plan with a lot of variability in your future options where they take the income or you take the money elsewhere? So without a fee you have much more growth potential. You got a higher growth rate and you're also recapturing the cost of the fee that goes right into your pocket, the annuity. Also, if the guaranteed income is not as high, then the Payments are not extracting as much value from the contract. So if a maximum guaranteed contract is twice as high, then your cash value is going to drain essentially twice as fast. They can be used for income that doesn't need to be maximized. And there's some situations where that might be important. The performance based contracts with no fee will have a higher residual value in the future for a lot of reasons. Either the lower payout or the higher growth rate or the no fee. Three reasons. So generally speaking, in most of the cases we do it. Fee based maximum income is the best way to go. For most people. You can achieve the most efficient stream of income. It's the cheapest, it's the best deal that leaves more additional funds for future and investment planning changes or different alternatives. Bottom line is guaranteed income. So I like to tell people that their goal after buying the highest guaranteed payment should be to live a long time and stick it to the insurance company. Live longer than they expected, eat healthy, exercise, get a lot of sleep, enjoy your life, remove the stress, get an annuity.
[00:08:57] You don't have to worry about it. You live longer. Annuity owners live longer, right?
[00:09:02] There are times when each type of contract has a definite place, when you can afford more flexibility or you want it. And I'm going to tell you the most common situation. So who should pay a fee for maximum guaranteed income? Two people. One is the person who wants to make purely objective decisions about the optimal retirement plan.
[00:09:20] Those guys are perfect for this. And those are my people. I love you guys. You guys know who you are.
[00:09:25] These people will pay the least amount of money for the income they need, knowing the additional investments they have will grow more because of it. The fees do not bother them because they see the long term benefit to their overall portfolio and understand the value of shifting this burden to the insurance company. I should have had a list. I could call you out by name because you're my buddies, right? But you know who you are. And number two is those who are barely funded or even underfunded for retirement cannot afford to take the risk.
[00:09:50] And unfortunately, a lot of those performance based contracts were sold to people like this with very hopeful projections that didn't pan out. Those guys are in a financial bind. So market investments, likewise, if they don't pan out for someone who's barely funded for retirement, will put you in a very compromised position. The value of paying a small fee for the guarantee is incredibly high for those who do not have a lot of wiggle room. Now, any of these, whether you should pay for A fee. This is just kind of an objective look at it like you could decide. And some people say, well, I like both sides of this. Split the money, do one of each. We've had people do that. Most common cases of people who should avoid the fee and go with performance based income, number one, and this is gray area here, but people 10 or more years from retirement have the time to continually alter the plan depending on performance. This has been useful for younger people who want the combination of safe assets, partial market participation and eventual guaranteed income of growth is sufficient. And if you know my work on the alliance products, I've talked about it, the cases where I've seen where it's appropriate, somebody that has more than enough money, relatively small part of their portfolio, at least 10 years from retirement, the product was suited for them, it had no fees. They wanted to take the shot and if it doesn't work out, they're going to have it liquid, didn't have a fee drag on it and they can go do something with it different, right? If the income doesn't work out, they retain plenty of options if they want to move to a different investment in the future. So this is why Nate, my buddy Nate, we did the podcast a little over a month ago to explain why he bought one of these at the age of 46. Now we had people that are 65, 70 that buy him for other reasons. That's the second time, the second instance when income isn't the main goal of an annuity purchase, but nice to have just in case so it's not the importance on maximizing it. Okay. Others who have bought one of these from me have some assets they want to protect. They don't want to pay fees. They enjoy partial market participation, but don't want to risk losing money. I told the story a couple of times and it's just like, hey, I like the performance of it and no fees. And I really like the idea not losing money. And hey, if the income's high grade, if it's not, maybe we may or may not take it, but if it's there, we can do it. Their income needs are covered elsewhere. This might come with a little bit of help for required minimum distributions in the future, but again, income isn't the greatest goal. They have money they want to protect and they like the value of the index annuity risk with no loss income backstop. Those are probably the people that are going to see giant performance and huge payouts as the people that don't really need it. I met with a lady earlier this week. And this is one of the things where she wanted to know the difference. She's got good retirement savings in addition to some cash in the bank that she wants to set aside and start building an income foundation Retirement. Hey, I want to start diversifying. Maybe I should buy one of these products. So she wanted to pull 100 grand out of the bank and do it. And we will look at the maximum payout just in general terms. A good company would offer in excess of 15,000 annually for life starting in 10 years. But the income rider would cost 1.25% for what is probably appropriate for the best opportunity for her. I said, well, look at that. You'll have your money out of it by the time you're. Before you're 72.
[00:12:42] So it could be good. But she specifically asked. She was one of those people, well, I don't really pay a fee, so what does that look like? We had to have a second meeting. And we showed this is the difference between the two. One is guaranteed, the other one is hypothetical. I showed her the one that Nate bought because it's got the best growth potential. If you're going to go performance base, you go with the highest rates available on the market. That's the one that's objectively verified to be true. It's as simple as that.
[00:13:05] Now, the baseline guarantee is based on no growth. It's the guaranteed minimum. There is a great income rider, but that was about 7,500 annually. So half of that. The amount over the same time period. The growth in the contract needs to make up that difference in order to get there. I ran a conservative illustration, which is not what a lot of people do. Again, a lot of Those guys show 10, 12% giant payouts didn't work out. People are disappointed. And I think if they would have just sold it with reasonable expectations. I've met several people who did buy it for. Oh, in the past, rates were low. Oh, if it gets 3, 4%, I think it'll be fine. And it does. It's good if it's in the right situation. It just sold away too many people. Right. Because these situations do not cover everybody. There's a lot of people that don't even need a guaranteed income are going to look at this and be like, I don't even want to watch that one. Right. The conservative illustration. And it projected to nearly match the guaranteed payout she could get with a fee. So I didn't go into that trying to. And I could have taken the illustration software, pick the best indexes because we know what they are, what they look like in the past and how those work. Crazy annuity indexes. You guys can go look. That's a good technical podcast for everybody who's like, hey, how are these things supposed to work? That's a good one. But it was close on a conservative estimate, so we could have, like, blown it out of the water. And I think she had somebody who showed her something like that, and she's like, wow, somebody was showing her $30,000 a year. That's not going to happen.
[00:14:20] Because she has 10 years from retirement, has ample retirements and a reasonable shot of matching that guarantee, she can afford to risk the possibility that it doesn't work out.
[00:14:29] I recommended the no fee option for her because she has the time and means to make changes if needed. She's saving a bunch of money, so she's going to keep saving more. That's one specific story. But above everything else is very general. You have to mostly align with one of these scenarios to match with either product. And the point is to try to get you to understand what you're giving up by not paying a fee. I don't care if you don't want to pay a fee. I agree, don't pay a fee, but know what you're giving up. And if it's something really important or critical to you, then that's what the fee is for. If you don't want the benefit, don't take the fee. Now, unfortunately, most of the guys out there are only going to show you one of the two. They're going to show you a blown up illustration of something performance based, or they're going to show you the guaranteed income. They won't say, here's the two options. I went through it with the lady I just talked about. I went through it. She's like, well, what else is there? I said, well, we're talking guaranteed income. So these are the two best options. You're not going to get a high enough payout with a variable annuity. And I checked Diaz, though, those don't even come close. So these are your two best options. Other than that, it's saving money. We're not talking about mygas or just even accumulation index annuities like we did a few weeks ago. But yeah, so she got to understand a little bit more about the annuity market, feel confident in it. We don't know what she's going to do yet. Everybody's busy. Everybody takes time. It's okay. Balls in her court. We'll talk to her again. If she's interested in either of the options and see what kind of questions she has. If they only show you one, I like to show you both so you know why you're buying the one you choose. And don't forget the performance based illustration with no fee might not work out, so be careful what you wish for. Get on my calendar if you want a fair explanation of what might be best for you. This has been episode 197, the nudity straight Talk Podcast. Like subscribe or comment on any of your favorite podcast platforms or on YouTube. Share it with your friends. Anybody you think might lend a critical eye to this so I can sharpen it up improve it for the next opportunity. Gotta tell you, like, I got a little fired up. I'm warm. I don't know, probably could do another outdoor episode. Anyhow, whatever it is, I got a great suggestion on episode number 200. Thanks for the people that offered, but next week we're going to go first with episode 198. Thanks so much for being here. I will see you then. Okay, bye.
